A PSA to invest your HSA
Updated: Jan 16
Over the past week, I’ve received inquiries almost daily about the Health Savings Account (HSA). So I’ve decided it’s a good time for a recap. Most people think of an HSA as a debit account they can use for medical expenses, which is true. However, most forget that they can actually invest the money in their HSA. In fact, only 5% of HSA holders invest their funds (source: Devenir). The HSA is super fantastically amazing, and so this stat is painful to me.
Let’s try to change this one Y&S student at a time!
The HSA Skinny
HSAs are tax-advantaged accounts you can use to pay for qualified medical expenses. When you sign up for an account, you usually get a debit card in the mail so you can access these funds easily when you visit the doctor, pharmacy, dentist, etc.
You can only contribute to this account if you are enrolled in a high-deductible health insurance plan that offers an HSA. However, if you switch plans at any point (say you move jobs) to one that doesn’t offer an HSA, you will not lose the funds in your HSA. In other words, your HSA lasts forever (or as long as you maintain money in your account).
HSA contribution limits are determined based on (a) what type of plan you have and (b) how many months out of the year you are enrolled in a high-deductible plan. For the full calendar year, or 12 months, you can contribute up to $3,850 for self-only and $7,750 for family plans (2023). If you are enrolled for fewer than 12 months, this amount is then prorated. For those 55 years or older, you can contribute an additional $1,000 beyond the aforementioned amounts.
Employers often make contributions to your HSA on your behalf. For example, my last employer contributed $100 to my HSA every quarter. Your employer contributions do count towards your max limit (again, $3,850)
You can hold a portion of the money in your HSA in cash and/or you can invest it.
HSAs have amazing, built-in tax benefits:
The money you contribute to an HSA will not be taxed up-front (e.g. you don’t face income tax on it)
The money you contribute to an HSA lowers your taxable income (e.g. you get a tax deduction)
If you choose to invest your HSA, those funds grow tax-free forever (as long as you ultimately use it for qualified medical expenses)
I often advocate investing in your HSA. Why?
There are two powerful features that make investing your HSA so powerful.
You can delay HSA distributions: When you incur a medical expense, you are not required to use your HSA to pay for that medical expense immediately. You can pay yourself back for that medical expense anytime using the funds from your HSA. As long as your qualified medical expense happens after you open your HSA, you can withdraw money at any time to pay for any old medical expenses. Essentially, you are reimbursing yourself.
The HSA is the ultimate tax-free account: You will not face income tax, you will not face capital gains tax, and lastly you will not face taxes on the distributions (money that you take out from your HSA account when you spend them on qualified medical expenses). No other tax-advantaged accounts offer a triple tax benefit, not Roth IRAs, not traditional 401ks, and certainly not regular brokerage accounts.
(For Tax Year, 2023)
Let’s work through an example to illustrate the HSA’s power.
You contribute $2,000 to your HSA. You can leave this money in cash or you can invest it. You decide to invest the whole thing. Later in the year, you go to the dentist and receive a bill for exactly the same amount, $2,000. Instead of using your HSA funds to pay for this medical expense, you pay for it with your usual credit, debit card or cash (side note: I often ask for cash discounts at the dentist!). When you pay for this bill, the money you use won’t be tax-free, but there is a long-term strategy you are holding out for here. Looking down the line 10 years later, your $2,000 has now grown to say $4,000 (assuming the stock market doubles your money every decade). At this point, you decide to “pay yourself” back. You take a $2,000 distribution from the account, and you still have $2,000 remaining. Voila, the power of compounding returns meets the power of the HSA!
Just remember, that once you invest your HSA, you now own stocks or bonds. You can’t pay for the doctor in stocks and bonds. So to use your HSA as a debit card for medical expenses, you would have to sell any shares in order to use that money as cash again.
What if I invest all my money in an HSA, and never have health issues?
Unlikely!! Expect to pay high medical costs in your old age. You can use your HSA for qualified long-term care insurance premiums and long-term care services, both of which you’ll likely need once you are no longer able to take care of yourself.
But assuming you never ever get sick, you don’t have to use your HSA funds for only medical expenses. In fact, you can begin withdrawing your money from your HSA for any and all expenses, but only after the age of 65. You won’t pay a penalty, but you will have to pay income tax on these distributions in any given tax year. So in this instance, the HSA more or less gets treated like a traditional IRA for non-qualified medical expenses.
Who is in charge of your HSA?
Assuming you sign up for health insurance through your job, your employer is the one that chooses the HSA provider. They also choose which funds in which you can invest. Some common HSA providers include Optum, HealthEquity and HSA Bank. Many providers tend to have a lot of fees (like monthly maintenance fees or high expense ratios) as well as regulations (e.g. a minimum investment or cash holding amount). In good news, however, you can open an HSA separate from your employer. So if your HSA contributions automatically route to your employer's HSA provider and they kind of suck, you can move that money over to another HSA provider that you do wanna work with (unlike the 401k which you can’t move until you terminate your employment).
As of January 2023, I recommend opening up an HSA with Fidelity, which requires no minimum to invest, no monthly fees, and an amazing selection of index funds.
I should also note that HSA providers start charging you higher maintenance fees once you depart from your company, so at minimum, you’ll definitely want to consider Fidelity as an HSA option if you change jobs.
A final note on selected a healthcare plan.
Before making a decision around the HSA, you should always evaluate the merits of your healthcare options first. If you have the option between a low and high-deductible plan, don’t just choose the high plan because you can invest with an HSA. Make sure it’s the right plan for you first. As someone with an autoimmune disease, I have found low-deductible plans to quite often be in my favor! It all depends on the plans being offered to you.
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